FX Exposure Management: What's My Risk?

Increasing numbers of publicly and privately held companies are impacted by movements in exchange rates. Many global organizations have articulated the negative impact on earnings in investor calls, and a number of privately held companies have had to re-negotiate credit agreements due to covenant compliance issues driven primarily by negative FX moves. All of this has led to an increased desire to create new FX hedging programs or to evaluate existing ones. Balance sheet hedging is no longer sufficient, as it only covers a short period of exposure (typically one to three months) and it does not truly reduce volatility in a company's fundamental currency mismatch between revenues and expenses. The first step toward developing a longer term hedging program remains understanding exposures. Because treasurers cannot pull this data directly from an ERP system they must be in constant contact with their colleagues within the organization and throughout the world. Having correct exposure data is critical; without it, a company is more likely to have a hedging program that does not work and even appears speculative, which could violate internal hedging policies or representations made to banks under ISDAs or related documents. Leading treasury teams rely upon new technologies and expertise to develop robust currency exposure management processes, often working closely with their FP&A team.

Commodity Risk Management: Whose Job is This, Anyway? 

For many companies, commodity risk management falls within the realm of procurement or supply chain management, but corporate treasuries are becoming increasingly involved in the process for a number of reasons. First, there are significant limitations to mitigating price fluctuations of key commodity inputs, such as metals or fuels, through supply chain negotiations. Many suppliers are only willing to lock in prices on certain inputs for short periods of time (perhaps only as long as three months), which does not address the true impact of price volatility on cost of goods sold and, ultimately, margins. More importantly, commodity risk naturally lends itself to be within the portfolio of treasury, which also manages currency and interest rate risk. Treasury cannot act on its own in the development and maintenance of such a program; teams consisting of treasury and supply chain or procurement professionals often come together to determine the key factors that drive quantity and price volatility, often focusing on issues such as competitor dynamics and the ability to pass on price changes to end customers. From there, the most innovative treasury staffs tend to bring commodity risk into the discussion with currency and interest rate risk, analyzing the impact of each in isolation as well as across all three asset classes and taking into account correlations, volatility and other market factors. While not easily done, recent technology advancements provide treasury with greater analytical tools to develop comprehensive commodity risk management programs.

Treasury as a Strategic Business Partner: Overcoming Obstacles

Treasurers often are the last line of financial defense for companies. Managing cash and liquidity is critical to success for any treasury team, but it is increasingly becoming the minimum expectation rather than an end unto itself. When adding up the various other trends, one bottom line holds true:  treasury is becoming more of a business partner, working with business units and across functions to ensure that sound decisions are made, particularly in the realm of financial risk management. Surveys of treasurers frequently express a desire to become more strategic, and the largest impediment tends to be teams that are understaffed, underinvested, and solely focused on the daily tasks that keep the liquidity of the company going. Innovative treasurers are pushing beyond this daily haze by building strong teams supported by outside expertise and technology tools. Specifically, these treasurers often are presenting to the board and working directly with their peers in financial reporting, procurement, business units, HR, and the C-suite to ensure that the overall risk intelligence of the organization increases substantially. As senior management is actively pushing this type of cross-functional integration as well, the dream can become reality, and the impact can be significant. Companies executing this playbook well tend to have highly risk-aware individuals across the entire organization, which allows for new and unique opportunities and better decision making.

Chatham Financial – Independent Partners

Whether it's interpreting and complying with regulation and hedge accounting complexities, quantifying FX exposure, understanding commodity risk management structure, or determining how to become more of a partner to the business, one thing  is certain: these challenges and opportunities require a great  deal of expertise and sophistication to achieve the expected efficiency and results. This is where Chatham Financial comes in as the independent voice of experience with advisory and technology solutions tailored to fit specific risk management needs. Chatham's practitioners specialize in derivatives regulation, hedge accounting practices, and holistic hedging programs that reduce volatility and give treasurers confidence.  As treasurers evaluate their goals for 2013 and beyond, having strategies that recognize these key trends will lead to more proactive plans and risk management success.